Internet access and use

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Internet access and use

Christian Helmers

21 April 2015

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Internet access and use

•

Most digital technologies rely on access to the Internet

• Who has access?

• How has access to the Internet changed economic behavior?

• What determines internet access?

•

The debate on net neutrality

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Internet access and speed

Source: FCC, 2013

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Growing demand for internet services

How much time do Americans spend on the internet

. On average 90 minutes

. Share of online users for ‘leisure’ steadily increasing

This average is deceptively low in part not just because it does not include time spent doing email, watching videos, and gaming, but also because it is calculated across the entire population

so is not representative of people who spend any time online. Figure 5 shows that the average is

low primarily because a fairly small share of the population reports spending any leisure time online (other than doing email and playing games). However, the figure shows that the share of the population who spend non-gaming and non-email leisure time online is increasing, and, on average, people who spend any leisure time online spend about 100 minutes a day—nearly one-third of their total daily leisure time.

Figure 5: Share of Population Using Computer for Leisure and Average Number of Minutes per Day Among Those Who Used a Computer For Leisure

Who Engages in Online Leisure?

Online leisure time differs across many demographics, including age and income. As most would

expect, the amount of online leisure time decreases with age, more or less (Figure 6). People

between 15 and 17 spend the most time online, followed by 18-24 year olds. Perhaps somewhat surprisingly, the remaining age groups report spending similar amounts of time engaged in online leisure. However, because total leisure time increases with age, beginning with the group age 35-44, the share of leisure time spent online continues to decrease with age.

7% 8% 9% 10% 11% 12% 13% 14% 15% 0 10 20 30 40 50 60 70 80 90 100 2003 2004 2005 2006 2007 2008 2009 2010 2011 Share of respondents Minutes

Minutes (left axis)

Share reporting time spent on PC for leisure (right axis) Source: Wallsten (2014)

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What people do online

Source: Wallsten (2014)

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Consumer surplus from internet

Value of Internet: Does the internet ‘crowd out’ other activities? If not, then purely economic transfer

phone calls since phone calls are specifically time spent “talking on the telephone.”20_{If people}

who are inclined to talk on the phone are also inclined to Skype, then perhaps the correlation is picking up like-minded people.

Figure 11: Estimated Crowdout Effects of Online Leisure on Major Categories

The analysis above controls for demographics, but any crowd-out (or -in) effects may differ by those demographics, as well. Table 5 shows the abridged regression results by demographic group.

Table 5: Crowdout Effect on Selected Major Categories by Demographics Demographic

Leisure (other than

online)

Work Travel Household activities Education

Helping household members Men -0.307*** -0.258*** -0.0638*** -0.0668*** -0.0620*** -0.00833 Women -0.283*** -0.264*** -0.0554*** -0.0642*** -0.0555*** -0.0724*** White -0.274*** -0.273*** -0.0680*** -0.0732*** -0.0546*** -0.0418*** Black -0.394*** -0.308*** -0.00453 -0.0348 -0.0450** 0.00511 Asian -0.305*** -0.151** -0.0589*** 0.00178 -0.227*** -0.0195 Hispanic -0.230*** -0.275*** -0.0590*** -0.174*** 0.0177 -0.0709*** <$10k -0.399*** -0.125*** -0.0180 -0.0686** -0.0817*** -0.0175 $10k - $19k -0.410*** -0.124*** -0.0255* -0.151*** -0.0335 -0.0398*** $20k - $29k -0.395*** -0.254*** -0.0287** -0.0345 -0.0307* -0.0581*** $30k - $49k -0.218*** -0.297*** -0.0658*** -0.0997*** -0.0425*** -0.0282** $50k - $74k -0.267*** -0.262*** -0.0746*** -0.0725*** -0.0733*** -0.0482*** $75k - $99k -0.209*** -0.383*** -0.0934*** -0.0134 -0.0892*** -0.0220* 20_{http://www.bls.gov/tus/tu2011coderules.pdf}_{, p.47} -1.05 -0.85 -0.65 -0.45 -0.25 -0.05 0.15 Leisure (excluding computer) Wor k Personal care (including sleep) Travel Household activities Education Helping household members Eating and Drinking Helping non-household members Religion Unknow n Volunteering Professional care and services Household services Government and civic obligations

Consumer purchase Phone

calls Total Crow dout Effect Source: Wallsten (2014) 6 / 23

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Consumer surplus from internet

Value of Internet: Does the internet ‘crowd out’ other activities ?

. ↑1 minute online time→ ↓0.29 minutes of other leisure

. ↑1 minute online time→ ↓0.27 minutes of work

20 phone calls since phone calls are specifically time spent “talking on the telephone.”20_{If people} who are inclined to talk on the phone are also inclined to Skype, then perhaps the correlation is picking up like-minded people.

Figure 11: Estimated Crowdout Effects of Online Leisure on Major Categories

The analysis above controls for demographics, but any crowd-out (or -in) effects may differ by those demographics, as well. Table 5 shows the abridged regression results by demographic group.

Table 5: Crowdout Effect on Selected Major Categories by Demographics

Demographic (other than Leisure

online) Work Travel

Household activities Education Helping household members Men -0.307*** -0.258*** -0.0638*** -0.0668*** -0.0620*** -0.00833 Women -0.283*** -0.264*** -0.0554*** -0.0642*** -0.0555*** -0.0724*** White -0.274*** -0.273*** -0.0680*** -0.0732*** -0.0546*** -0.0418*** Black -0.394*** -0.308*** -0.00453 -0.0348 -0.0450** 0.00511 Asian -0.305*** -0.151** -0.0589*** 0.00178 -0.227*** -0.0195 Hispanic -0.230*** -0.275*** -0.0590*** -0.174*** 0.0177 -0.0709*** <$10k -0.399*** -0.125*** -0.0180 -0.0686** -0.0817*** -0.0175 $10k - $19k -0.410*** -0.124*** -0.0255* -0.151*** -0.0335 -0.0398*** $20k - $29k -0.395*** -0.254*** -0.0287** -0.0345 -0.0307* -0.0581*** $30k - $49k -0.218*** -0.297*** -0.0658*** -0.0997*** -0.0425*** -0.0282** $50k - $74k -0.267*** -0.262*** -0.0746*** -0.0725*** -0.0733*** -0.0482*** $75k - $99k -0.209*** -0.383*** -0.0934*** -0.0134 -0.0892*** -0.0220* 20_{http://www.bls.gov/tus/tu2011coderules.pdf, p.47} -1.05 -0.85 -0.65 -0.45 -0.25 -0.05 0.15 Leisure (excluding computer) Wor k Personal care (including sleep) Travel Household activities Education Helping household members Eating and Drinking Helping non-household members Religion Unknow n Volunteering Professional care and services Household services Government and civic obligations

Consumer purchase Phone

calls Total Crow dout Effect Source: Wallsten (2014) 7 / 23

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Net neutrality

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Structure of the Internet

• Content providers (Google, Amazon etc.)

• Infrastructure/network providers (Level3, AT&T, CenturyLink, etc.)

• Broadband service providers (AT&T, Verizon, Comcast)

• End-users

•

Broadband service is a two-sided market

• Need content providers to attract subscribers and need subscribers to attract content

• 2 challenges

1 How to set prices (to cover fixed costs)

2 Network effects

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Net neutrality – an ideological debate

•

Net neutrality has been built into the fabric of the Internet since its

creation but it is also a principle that we cannot take for granted.

We cannot allow Internet service providers (ISPs) to restrict the best

access or to pick winners and losers in the online marketplace for

services and ideas.

(President

Obama

)

•

There is one important technical legal difference of opinion between

the President and Comcast: we do not support reclassification of

broadband as a telecommunications service under Title II. Doing so

would harm future innovation and investment in broadband and is

not necessary to put in place strong and enforceable Open Internet

protections.

(Comcast)

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Net neutrality

Source: Cloudflare, 2014

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Internet access and speed

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Net neutrality

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Net neutrality – the debate

•

Push by Internet service providers (e.g. AT&T, Verizon, Comcast)

to abandon net neutrality

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Service providers want to charge content providers (e.g. Google)

and provide fast lanes (and hence slower lanes)

•

Content providers (e.g. Microsoft, Google, Amazon) want to

maintain net neutrality

•

Debate about pricing of internet services (price discrimination)

•

How to provide incentives for internet service providers to invest in

networks

•

Fear of monopoly power in market for internet services

•

Could influence end users’ choice of content provider

•

Could influence incentives for content providers to offer new (types

of) services

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Net neutrality – the decision

•

In February 2015 FCC adopts

Open Internet

rules:

• No Blocking: broadband providers may not block access to legal content, applications, services, or non-harmful devices.

• No Throttling: broadband providers may not impair or degrade lawful Internet traffic on the basis of content, applications, services, or non-harmful devices.

• No Paid Prioritization: broadband providers may not favor some lawful Internet traffic over other lawful traffic in exchange for consideration of any kindin other words, no ”fast lanes.” This rule also bans ISPs from prioritizing content and services of their affiliates.

• Reclassificationof broadband internet as utility under Title II of the Communications Act of 1934

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A simple model (Gans, 2014)

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Set-up

• 1 internet service provider (ISP)

• 2 content providers (CP₁ andCP₂)

• 1 consumer

•

Assumptions

• CPs generate value for consumer wherev1 >v2

• CPs earn other revenue (e.g. advertising)ri (wherei=1, 2), such

that total revenue isv₁+r₁ >v₂+r₂ • Consumer chooses only 1 CP

• ISP incurs costc to provide CP’s content to consumer

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A simple model (Gans, 2014)

•

Definitions

• ISP charges consumer price contingent on CP chosen(t₁,t₂)

• ISP charges CPs transit price(a₁,a₂)

• CP charge consumer(p₁,p₂)

•

Net Neutraility (NN)

• No regulation: ISP free to set(t₁,t₂)and(a₁,a₂)

• Weak CP NN:ISP forced to set a₁=a₂=a • Weak consumer NN:ISP forced to sett₁=t₂ =t • Strong NN:ISP forced to sett1=t2=t anda1 =a2 =a

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Results (Gans, 2014)

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No regulation:

• CP sets priceti+ai =vi+ri (i =1, 2,) • Consumer choosesCP1 (socially optimal)

• CP earns zero surplus

• Consumer earns zero surplus

• ISP earnsv₁+r₁−c

2

Weak CP/consumer NN:

ISP forced to set

a

₁

=

a

₂

=

a

• CP sets priceti+ai =vi+ri (i =1, 2,) • Consumer choosesCP₁ (socially optimal)

• CP earns zero surplus

• ISP earnsv₁+r₁−c

• But prices difference relative tono regulation

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Results (Gans, 2014)

1

Strong NN:

• Consumer choosesCP₁ (socially optimal)

• CP earnsv_i+r₁−(v₂+r₂)

• ISP earnsv₂+r₂−c

• Overall surplus does not change, but surplus shifted between ISP and CSP

• ISP earns less, CP earns more than underno regulationor weak CP/consumer NN

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Extension (Gans, 2014)

•

What happens when a price is missing?

• Assumep1 =p2=0

• Consumer choosesCP1 if v1−t1 ≥v2−t2

• 2 cases

1 v1≥v2: consumer choosesCP1and ISP earnsv1+r1−c

2 v1<v2: under weak consumer or strong NN, consumer chooses

CP2, ISP earnsv2+r2−c

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Dynamics (Gans, 2014)

•

Incentives to invest for CPs

• CP only earnsvi+r1−(v2+r2)understrong NN

• More complex if missing price

•

Incentives to invest for ISP

• Sunk costsC>0

• If undertaken, generate consumer value∆where ∆>C • No regulation: ISP earnsv₁+∆+r₁−c−C

• Strong NN:ISP earnsv₂+∆+r₂−c−C

• No change in incentives to invest (missing price irrelevant)

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Implication (Gans, 2014)

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Fast lane

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Changes to the model:

• ISP offers fast lane to CPs forAand slow lane fora • ISP incurs costC for providing fast lane

• IfCPi chooses fast lane, value to consumer is∆i greater than if slow

lane chosen (with∆₁>∆2)

•

Results:

• Weak CP/consumer NN:consumer choosesCP₁ andCP₁ chooses a fast lane, ISP earns entire surplusv₁+∆1+r1−C

• Strong NN:consumer choosesCP₁ andCP₁ chooses a fast lane, ISP earnsv₂+∆1+r2−C andCP1 earnsv1+r1−(v2+r2)

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What have we learnt?

•

Internet has become accessible almost everywhere

•

Different uses

•

Net neutrality

• Only strong NN has real effects

• Effect on allocation of profits between ISP and CPs

• No effect on consumer behavior (provided CP can charge consumer directly)

• Improves dynamic efficiency in terms of CP investment

• No effect on ISP investment

• Even with fast lanes, CPs may obtain positive surplus

•

Other issues:

• Spectrum availability

• Tight regulation of broadband services

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References

•

Federal Communication Commission (FCC) (2013). Internet Access

Services: Status as of December 31, 2013, available under

http

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pdf

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Gans J.S. (2014). Weak vs Strong Net Neutrality, NBER WP 20160.

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Wallsten S. (2014). What are we not doing when we’re online?,

mimeo.

Obama)